Let me begin by thanking the organizers for inviting me to deliver this keynote address before this distinguished panel at the Offshore Technology Conference, which is one of the premier global oil industry events. “Energy leadership and outlook” conjures up ideas of responsibility, insights, competence, readiness for action and a host of other attributes aimed at ensuring that the consumer receives his energy in a secure and orderly manner and at reasonable prices. This has certainly been OPEC’s objective and guiding principle since our Organization was established 45 years ago.

(Slide 2) In my presentation today, I shall first look at the recent market behaviour, explore the main reasons behind the rising oil prices, and explain OPEC’s response. I shall then turn to the longer-term outlook, emphasising the need not only for security of supply, but also for its mirror image, security of demand. This applies along the entire supply chain, including the downstream.

(Slide 3) As you know, oil prices have reached historic highs over the past fortnight. The price of OPEC’s Reference Basket has risen above US $65 a barrel, which means it has doubled in around two years. Nevertheless, in real terms, prices are still well below the levels seen in the early 1980s, when the OPEC Basket would have reached $85/b, at today’s prices. We should also not forget that, over the last two years, there has been a strong increase in non-energy commodity prices, sometimes at rates greater than that of oil. This is an often overlooked fact.

Today’s oil price movements have been influenced by a convergence of factors.

(Slide 4) First and foremost, oil demand growth has been exceptional. Fuelled by high economic growth, global oil demand surged in 2004 by 2.9 million barrels a day. Such a high level of demand growth has not been seen since the early 1970s. North America and the developing countries, in particular China, were at the centre of this remarkable spurt. It moderated somewhat during 2005, with demand growing by just under 1 mb/d.

(Slide 5) There has also been a slow-down in the rate of expansion of non-OPEC supply. This is, in part, a delayed reaction to the lower oil prices witnessed at the end of the 1990s, with the commensurate stalling of expenditure on exploration and development gradually being felt.

(Slide 6) Next, there has been tightness in the downstream sector. In three key regions of the world — Asia, Europe and the United States — refineries have been operating at 90 per cent of capacity and above for much of the time. In this situation, any disruption can create product shortages — whether from a maintenance shutdown or an emergency such as Hurricanes Katrina and Rita. There is also a lack of capacity to process heavier sour crudes, causing the prices of light sweet crudes to climb even higher and the differentials between crude grades to increase. All these factors have contributed to downstream tightness, a situation that, based on the information available today, OPEC does not expect to ease in the near term.

(Slide 7) Also influencing price movements has been increasing activity in the futures market, with a new inflow of capital movements by hedge and pension funds. Indeed, open interest contracts in the NYMEX passed the one million mark for the first time just last week. Add to this mix natural disasters and uncertainties stemming from other disruptive events across the globe, and it is understandable why there is so much volatility at the present time.

(Slide 8) OPEC has been responding as necessary to the need for additional oil, underlining its continued commitment to achieving market stability. Indeed, OPEC’s Member Countries have increased production by around 4.5 mb/d since 2002. Despite the impact of Hurricanes Katrina and Rita late last summer, OPEC’s assurances of healthy supply helped prevent that supply interruption from developing into a major crisis. Moreover, in September 2005, OPEC additionally agreed to make available to the market spare capacity of around two million barrels a day in Member Countries, should it be called for. On top of this, further increases in OPEC capacity are being implemented. It should be noted that, at all times, the market has been well supplied with crude oil.

(Slide 9) These actions are fully in line with OPEC’s longstanding objectives, as set out in the OPEC Statute in 1961. In addition to ensuring the stabilisation of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations, OPEC aims to secure an efficient, economic and regular supply of petroleum to consuming nations and a fair return on their capital to those investing in the petroleum industry.

(Slide 10) Looking at the United States, where gasoline prices have surged, we see that crude oil stocks have increased to their highest levels since 2001. Gasoline stocks, on the other hand, are declining, for several reasons. First, there has been a heavy refinery maintenance schedule in the first part of this year. Secondly, and more importantly, the introduction of new specifications and the removal of the use of MTBE have created additional tightness in the downstream and more costs, in particular given the high price of ethanol and the logistical difficulties in transporting it. In addition to federal and state taxes, the diversity of specifications has created niche gasoline markets and made gasoline less fungible.

There is a need for harmonisation between environmental and energy policies. All actions that could help alleviate the upward pressure on gasoline prices, while taking into account the long-term perspective and the need for incentives to invest in the downstream, are very much welcome.

Let me now say a few words about the future, because OPEC is as committed to market stability in five, ten or 15 years’ time as it is today.

(Slide 11) Turning first to oil demand, the reference case scenario contained in OPEC’s World Energy Model forecasts a 30 mb/d rise in demand by 2025, to reach 113 mb/d. This is an annual average rise of 1.5 mb/d. Consumption of the incremental barrel will be dominated by the developing countries, in particular, Asian countries. By 2025, we expect Asian oil demand to rise by 17 mb/d. Despite this growth, by 2025, OECD countries will remain the dominant oil consumer and the USA will continue to use five times more energy per person than China.

(Slide 12) From the supply perspective, let me first say that the resource base is sufficient to satisfy expected world oil demand for decades to come. Non-OPEC supply will continue to increase, in particular over the next five years, and is eventually expected to reach a plateau after 2015. Thus, most of the new demand will be met by non-OPEC in the short-to-medium term and by OPEC in the longer term. By 2025, OPEC production, including natural gas liquids, will reach 54.3 mb/d, according to these projections. However, even then, non-OPEC countries will still account for the larger part of world production.

(Slide 13) Is sufficient investment being made today? The answer is: yes. OPEC crude capacity expansion plans already in place are expected to result in almost 38 mb/d of crude capacity by the end of 2010, an increase of nearly 5 mb/d. This is in spite of the current high costs, which, in turn, have arisen, at least in part, due to shortages, in particular in services and human resources, following the period of low prices witnessed late last century. Similarly, production capacity of natural gas liquids and other liquids continues to rise. This capacity growth is underpinned by more than 100 projects totalling $100 billion. These projects are in addition to energy infrastructure investment. This investment is expected to further increase OPEC’s spare capacity to 5–8 mb/d over the next five years.

(Slide 14) However, there are both upside and downside oil demand scenarios, as shown here. The difference between the demand forecasts in the reference case scenario and the low-growth scenario is 10.5 mb/d in 2025. This translates into an uncertainty of 10.5 mb/d of demand for OPEC oil.

While technologies and policies create uncertainty, most of the risk is on the downside. For example, since so much of the new demand will come from the transportation sector, technologies that improve vehicle fuel efficiencies could have a large downward impact on oil demand growth. Policies that discriminate against oil, such as those promoting biofuels, could also have an impact.

(Slide 15) What does this uncertainty in oil demand mean for OPEC? This graph shows the cumulative OPEC investment in new oil capacity for each of the three scenarios shown on the previous slide. By 2015, the range for oil demand results in an uncertainty range for OPEC investment of $150–290 billion. By 2020, the range increases to between $230 and $470 billion! This uncertainty places a huge amount of risk on OPEC Member Countries. If these countries invest at the top of the range, and the demand does not materialize, then collectively our Organization will end up sitting on billions of dollars’ worth of unused capacity. Such a scenario would be highly detrimental to OPEC countries that have other priorities for investing their oil revenues, such as their economic and social development. It would also put downward pressure on oil prices.

(Slide 16) The investment challenge, however, extends along the entire supply chain. The downstream sector is a very important part of that chain, with current tightness in the form of inadequate refining capacity putting much pressure on oil prices generally. Several factors will shape developments in this sector in the coming decade: the rising volume of crude oil that needs to be refined, the expectation of a continued move towards demand for lighter products, and the trend of product specifications towards significantly cleaner products. On top of the need for further distillation and conversion capacity, it is estimated that additional desulphurisation capacity of more than 20 mb/d will be required over the next ten years. The downstream sector will require significant investment to address these challenges.

(Slide 17) It is estimated that about $160 bn in capacity investment will be required by 2015, with another $150 bn needed for maintenance and replacement of lost capacity. These estimates do not include the infrastructure required beyond the refinery gate, such as pipelines and terminals. However, analysis of available data indicates that investment in the refining sector is coming at a much slower pace than this.

A more orchestrated effort is clearly required to ensure that sufficient capacities are in place in the future. There is, therefore, a pressing need for ways to be explored that could accelerate expansion plans. Most importantly, it should be recognised that the primary responsibility for investment in the downstream sector lies with consuming countries.

Finally, ladies and gentlemen,

(Slide 18) Energy security is a fundamental issue. And security of supply and security of demand are mutually dependent. But energy security applies across the supply chain. Moreover, we should never lose sight of the fact that energy security applies to all nations of the world, and that the central issue of energy poverty eradication requires urgent attention. If we turn our minds back the World Summit on Sustainable Development in 2002, we will recall that poverty eradication is the first UN Millennium Development Goal. A comprehensive and balanced approach to the three pillars of sustainable development is required, for economic growth, social progress and protection of the environment.

The way forward is through dialogue and cooperation among all players. To this end, OPEC continues to devote much effort in this direction, with dialogue now being widened and deepened in an open and constructive manner. Three major advances were made last year with the establishment of energy dialogues between OPEC and, respectively, the European Union, China and Russia. Only last week, representatives from oil-producing and -consuming countries, and major international oil companies, held a high-level stakeholders’ meeting at the specialist producer-consumer body, the10th International Energy Forum (IEF), in Doha, in order to discuss at length the latest developments affecting the industry. At the end of last week, we hosted in Vienna a very enlightening Roundtable between OPEC and China, with representatives from both governmental level and from the industry.

An important and very practical outcome of the IEF has been the launch of the Joint Oil Data Initiative (JODI) by six intergovernmental organizations, including OPEC, with the aim of releasing more complete and timely data. OPEC considers the JODI initiative to be an essential tool for improving efficiency and transparency in the oil market — indeed, this was also recognised by the Group of Seven industrialised countries, when they met on 21 April.

Energy leadership has many sides to it, as I noted at the beginning of this keynote address. I hope I have successfully managed to enlighten you on the efforts that OPEC makes to bring about order and stability in the international market, to the benefit of producers and consumers alike and in support of sound growth across the global economy.